Preston Pysh  10:05  

The thing I took away from what you said, Guy, is that it really requires a lot of research and a lot of reading. It requires a lot of maintenance and due diligence on the part of the investor.

Hari Ramachandra  10:34  

One last idea here is that writing a book is a team effort. Any way you look at it, the way I looked at it, examining and learning about companies, is a team effort. The question is who we have in our team. If our team has a bunch of sell side analysts, that’s really bad. With all of the greatest respect to Adam Grant, he is an academic, he’s not an investor. So it’s a cute idea about the size of the photographs, but it probably is not significant. 

Guy Spier  12:07  

I think if you have a really sanitized group of friends, and by sanitize, I mean that there are people who are not grinding an axe in one way or another. That doesn’t just mean that they’re not sell side analysts. That means that they don’t have an ego that they want to prop up. They don’t have a need to prove that they’re right. 

There are all sorts of reasons why somebody might not speak honestly and openly about what they saw when they looked at something, but to get somebody like those engineers at Google…

Preston Pysh  13:02  

Great discussion. I thoroughly enjoyed this discussion that you had on owning the Tupperware stock, because it led to this deeper discussion of value creation and win-win relationships in society. This is something that was really big in the Charles Koch book that we read, “The Science of Success,” where he talks about the same thing of how I can add value to society.  

I just really found it amazing that you highlighted the same exact discussion and you talk about how you came to that conclusion in your book. 

Is this something that you can describe briefly? 

Guy Spier  14:06  

It starts off with me reading in one of Charlie Munger speeches about how the Tupperware parties are *inaudible* psychological effects that make it possible for Tupperware to be so successful. 

Being the person that I am, I then went and loaded up the top four annual reports. They arrived a few days later. It was *inaudible* because this was a company with huge margins, and very via very high return on capital. 

I just thought, “My God, this is an awesome business. I need to buy it and I raised it to buy the stock.” 

I think I even wrote a letter to Charlie Munger saying I’m so excited that you talked about it in the speech because here I am with my own Tupperware. I think Charlie Munger would have seen that letter and he would have said, “What a misguided soul.”

So there I am all excited about Tupperware. I went down there, the investor relations met down in Orlando a few times. The guy who runs the company is incredibly charismatic. 

Two or three hours later, every time I’m expecting earnings to grow, but some region in the world is not doing well and sales are just not growing. It is obvious now, but I just couldn’t figure it out then. I can’t remember exactly what it was, where it finally dawned on me that you can buy containers that do exactly the same job like Tupperware does in all sorts of places now. 

This is pre internet, so you couldn’t buy them over the internet, but even then you can buy them in all sorts of stores for half the price. It just took me time for the pin to drop to realize that this product is very, very highly priced. We have a highly priced product that is hard for you to grow sales because by creating this Lollapalooza of Tupperware parties, where you have all these effects combined, can you convince people to pay so much money for your Tupperware. 

However, in any normal circumstance, that’s not going to happen? At the same time, this is an example of what doesn’t make it into the book. I owned shares in a company called RLI, Replacement Iens insurance. I was attracted to this company by their extraordinary combined ratio. 

So they had a very, very, very profitable underwriting operation. I was so excited to own this because as Warren Buffett says the key for an insurance company to do is profitable underwriting, and these guys were profitable. Again, premiums just did not grow. 

It took me a long time to realize that the reason why premiums were not growing was that everybody knew our RLI will offer these excess and surplus lines and charms, but you only went to RLI when you couldn’t find the coverage anywhere else.

With the greatest respect *inaudible*, they price gouge you so people did business with them when they had to, but they were never going to come back with more or less. They were forced to and that wasn’t a good recipe for growth.

That said, it’s not like I lost money with Tupperware. It’s just that I invested a lot of time and energy. I could have invested in probably over the same period. Berkshire Hathaway made a lot more money.

Preston Pysh  17:59  

That’s what I say about every pick that I don’t pick when it’s great. 

Guy Spier  18:04  

It’s a very, very high bar to beat. It’s a bar that’s available in the stock market every day. Then this idea of if you then compare it, I think moving back and forth, what am I doing? What’s Warren Buffett playing?

I started to see the pattern… I don’t know if it’s true to say every single one, but so many of the Berkshire building businesses have this model where they’ve created something that they can do for lower cost than anybody else. 

And so, it just becomes the natural resource, or the natural place to go for it, whether it’s reinsurance, NetJets or Geico, they’re all based on this idea of we’re going to drive costs out of our system. That’s where the lowest cost operator, and when you can provide something that you can profitably provide something to the market at the lowest cost. You have an extraordinary formula for business.

Preston Pysh  19:11  

This goes to a common theme that we’ve talked about in some of the other books that we’ve done, when you see these managers that rack and stack their interests in the right order. Stig and I obviously argue that the right order is customers first, employees second, shareholders last.

When you rack and stack it in that order and that’s where your focus is, it is really difficult for a company to not be successful unless they just got a bad service or a bad product. When they think about things in those terms, they need to try to balance it as much as possible. 

However, if they have to actually prioritize what comes first, what’s come last. That’s how it always has to go in order to have a long term success of a business.

Guy Spier  19:55  

That’s what IKEA did. I think that what’s also very interesting about those kinds of business models is that it’s very hard to make them successful very quickly and in a short period of time.

Upfront, you have to work at it for many years before they start becoming successful. So again, they’re the kinds of businesses that reward people who are willing to build now and are willing to invest for a great future down the road. 

Stig Brodersen  20:36  

It also really reminds me of The Dhando Investor, Mohnish Pabrai’s book where he keeps talking about having this moat. He also talks about Geico? Because even though everybody can see what another company is doing, like for instance, Geico or a company like Walmart, it’s simply impossible to clone because you don’t have that competitive advantage. You cannot do it as cheaply as they can. That’s really the key to a long term moat.

Guy Spier  21:12  

Now just to loop this back to a previous thought. We as individuals with small businesses have an incredible advantage over people with bigger businesses, at least most businesses, other than some of these companies, like Costco or Geico, which is that. In a certain way, this sort of goodwill strategy is a marketing strategy. But it’s a marketing strategy that is predicated on doing something for five years before you see any reward. 

If you go to your management of any kind of business and say, “Look, I’ve got this great marketing idea. This is what’s going to happen and we’re going to have these costs for about five years, and then rewards ought to start coming through,” you’ll be laughed out of the room. Most of the management team will be going to give us maybe 18 months. If we can’t show results in 18 months, sorry, we can’t do this. 

That means that there’s a skew in the world, away from these kinds of very, very long term goodwill creation strategies that the vast majority of people just cannot follow, because they’re caught in an environment, which just doesn’t reward it. That means that we can follow those. 

We have a huge advantage over the people who don’t see it, and over the people who are in corporate environments. I’d like to believe that every single one of these businesses like Walmart, IKEA, Geico, Costco, the people who started those businesses started with the very same ideas of this beautiful creation, or if we looked at the Rose Blumkin Nebraska Furniture Mart story. She was not concerned about how much money she was making. She was concerned about prospering delivering value to the customer. She never thought about how much it took decades before the benefits started flowing through. 

So what was amazing about this is that when I understood what Nebraska Furniture Mart was about, there was a part of me that wanted to go out and buy some furniture business in Brooklyn and see if I could recreate it in New York City. But of course, that would have required a lifetime of dedication. It was not my path.

Stig Brodersen  23:35  

Okay, my next question is: one thing that I learned from your book is that Mohnish sometimes calls you up with an investment idea and says, “Hey, Guy, what do you think about this? Is that something that we should invest in?”

Well, first of all, it must be really nice to have someone from one of the best investors in the world call you up and say this is my smartest idea. This is completely insider knowledge. Do you want to invest with me? That was the first thing I thought. 

Then the next thing I thought was sometimes you must feel that this investment pitch is outside of your circle of competence. So even though you get the best knowledge from the best investor, sometimes you must reject this investment pitch. But how often do you do that? Or am I completely wrong in my thought process here?

Guy Spier  25:16  

So, I would start off by saying that I don’t think that Mohnish Pabrai needs my spirit to see if something is a good idea or not. He’s certainly not pitching these ideas to me. He would be more curious to see how this individual, Guy Spier, with his particular inquiry reacts. 

I think that the way to imagine what is going on is the investment idea is sitting in some kind of reagent. He wants to see how that investment idea interacts with that quantity that is Guy Spier and he mixes them together to see what happens. Mohnish is extremely independent minded. 

I’m just a sort of a, I would argue a jar in his lab. He’s like taking the investment idea and pouring into that jar and seeing what color at times. Just to give you a sense, and I think that he understands the way I’m wired, and knows that I’m wired so differently to him. So there are things that he doesn’t feel very strongly and that I feel a lot more strongly. He’s curious to observe. 

How that plays out with me and I will tell you that there are many circumstances in which I have an utterly negative response, but that doesn’t stop him. Sometimes I see it, and sometimes I don’t.

I don’t think I feel bad about that at all. I don’t feel bad about the fact that I think that he’s capable of taking much bigger bets, when something was clear, it was clear to him. Even if something was as clear to me, I’m just not capable of taking those big bets. I think that I struggled with that for a certain period of time and I don’t struggle with it anymore because it’s about being authentic.

I’d rather be a true version of myself and have low returns than have an inauthentic version of myself and have higher returns. So yeah, he’s not pitching. It really doesn’t matter what I think.  

He’s using me as his just a sort of a test tube in a lab to see what kind of a time when he calls the idea in and he absolutely doesn’t need me to make the investment or not to make the investments. He’s capable of doing that on his own.

I will just give you one last idea on how we talk about diversity in the United States. What we’re really looking for is not when we were looking for diverse teams is not physical diversity. We’re looking for cognitive diversity, we’re looking for people who think very differently. 

I think that we should be looking at an investment conversation, there’s some qualities that you want, you want discretion, you want people not to talk about what you’re talking to them about. You want intelligence. You want them to have low ego, so they’re not trying to prove anything to you and they respond. 

But then I think you’re looking for somebody who thinks differently, who just thinks in a different way, sees the world in a different way, because that contrast provides somebody… then it’s sort of like to go away and say, “Hmm, this is the reaction that this person had. Let me try and understand why they have that reaction.” There’s a lot of learning in that. 

Preston Pysh  29:37  

Alright, Hari, you got the next question?

Hari Ramachandra  29:41  

Sure. I would like to share with the listeners of this podcast that apart from Guy’s book, his letters to the investors of Aquamarine Fund are a fascinating read. I believe there are three letters posted on the website.

One of the ideas I got out of the letter of 2012 is the idea of Hydra. Hydra is an organism that grows two heads when one of its heads is cut off. This is basically where Guy is explaining Nassim Taleb idea of anti-fragility.

My question is related to that. You talk about being a Hydra in the investing world that is being resilient. However, individuals like us who are not really full time investors are fed up or even scared by the media .We are usually confused as to what one should do? So I wanted to ask you to share your advice with individuals like me about how to manage their personal finance and life to position themselves to be antifragile.

Guy Spier  31:34  

When you figure out the answer, just let me know who’s figuring it out as well. But so very genuinely, I mean, I think there’s no easy or short answers. Again, I don’t have one bullet that sort of deals with it all. 

A subject that I don’t understand very well, but it’s so fascinating to me, is how life exists. I was telling my dad this morning of how I saw biochemists at my undergraduate college walking around with biochemistry textbooks. They’d be studying chemical pathways in the cell. 

The way these chemical pathways were presented as one loop that exists on its own. It was a real revelation to me to realize that these chemical pathways, it’s really better to think of networks of chemical pathways and, and so it’s very hard to predict what one chemical pathway will do. You can have conclusions, which are not obvious. 

One example that Michael Crichton talks about in one of his books is this idea of forest fires, which is now well known, where originally forest tree services had this idea that if you just put out forest fires, that was the right thing to do. 

It turns out that it’s counterintuitive that allowing small forest fires to burn prevents larger forest fires. I know that this is related to your question. 

So when you come to the hydra investing world, I think that all I can tell you is all sorts of things that I know it’s right to do at the margin, in order to improve the probability that we will be able to seize upon opportunity when the world falls apart, if and when the world falls apart. 

To improve the term for me is to improve the terms on which the capital is sent to me. So if the capital can be called away from me, within three months, I behave very differently to if the capital can be called away from me in one year. That would be very different if the capital is never pulled away from me, which is what Berkshire Hathaway has. Those are sort of like three different stages. You could go even further…

The capital that Berkshire Hathaway has to invest… The insurance capital is completely uncorrelated. What’s key about that leverage, some people say, “Well, Warren Buffett has leveraged. It’s just called an insurance float.”

But the point is that leverage is not dependent on the capital markets. It is dependent on events in the real world. And so, it’s deeply uncorrelated with the financial market. So if you take that to individual investors, the absolute key is to not feel like I’m going to need the money anytime soon, to literally be able to just not think about it. 

Then if you want to take that one step further, if there are all these talking heads that are telling you to worry about five hyperinflation, you might want to turn those talking heads off. That is a conscious desire to improve your environment basically. 

I think they’re just dozens if not hundreds of these micro decisions that one has to take to gradually improve who we are. If I come from the perspective of the Aquamarine Fund, what I need to do is look for capital, it’s not about becoming bigger. It’s about improving the terms on which capital was sent to me. Obviously, Mohnish is going on that in a very big way by doing Dhando Holdings, which is a permanent capital vehicle.

I think that the best places and individual investors to work on things *inaudible* and why. Then I will tell you on the hyperinflation side, this is just me speaking, I fear that not because I listened to talking heads, but because I see the size of the central bank’s balance sheets. 

My answer is every single investment that I make has to be patient and protected.  Just to give one example of that, my MasterCard and Visa take sort of a percentage slice miniscule slice of every transaction that passes through their system. There’s a nominal slice. 

So as prices go up, their revenues are completely tied or indexed to inflation if you’d like. You could argue that the center banks are also indexed to inflation.

As I wrote in the letter, it’s my goal, I haven’t fully figured it out. If I did, I probably would have written that down. One other thing I’ll tell you is that all the letters are on the website. So you can go back and you can actually see the progression from not so well written letters to much better written letters, as you go through.

Hari Ramachandra  36:43  

I have a follow up question for that. When you categorize what is anti fragile and what is fragile, and you list a concentrated portfolio under fragile… I was a bit confused, because Charlie Munger and Warren Buffett advocate concentrated portfolios. I wanted to know your thoughts on why you consider it as fragile?

Guy Spier  37:09  

Oh, that’s a too painfully easy question for me to answer. When I went into the financial crisis of 2008, pretty much the vast majority of my assets were in stocks. One of those went down by 95%. Another one was American Express that went down by 80%. 

There’s no question that the way I was structured, having a concentrated portfolio in 2008, was fragile. If it wasn’t for some other aspects, dynamics of the system that I was a part of that were anti-fragile, like, father and family is stuck with me. And me having some relationships that helped me to focus on the long term. I think that it’s possible that I would no longer be running Aquamarine fun. 

So I would still argue that in terms of Taleb’s terminology, I think that a concentrated portfolio is fragile. It’s more likely to show extraordinary swings in value. Unless you have other elements of your game in place, that could result in an end to your business.

Preston Pysh  38:22  

Guy, are you seriously contemplating starting a holding company in the future? From your comments, that’s how I took it, to be honest with you.

Guy Spier  38:33  

I think that it’s a logical place to want to go. I think that what I just told you, though, is that I don’t think now is the right time. For me, I think I’m probably a little too focused on promoting my book. It’s sort of my baby and that’s sort of where my mind is at right now. 

I would also argue that… the nice way for me to put it is I have a different skill set. Just because I’m an okay investor, I live with good returns, that I think there’s a much broader set of business skills that are required to have a holding company. You have to be able to raise the money in the first place. You have to be able to manage people, you have to be able to pick people.

My decisions right now are relatively simple because it’s just deciding whether I want to own the stock or not. When you get into close contact with management, that is a whole different set of skills. It’s something that I will just tell you that I aspire to, but I think that I have to be honest with myself and accept that I may not have the skills to do that well.

Preston Pysh  39:47  

Alright guys, so I have the last question here. I stole this question from Tony Robbins because I was such a good question. If you weren’t allowed to leave your children any financial assets when you die, only knowledge, which book outside of your own would you bequeath to them? Can you summarize two or three of the main points of the book?

Guy Spier  40:08  

I hope that I’m not a cop out here. I’m Western educated and all of those good things. I have to say that I just think that the foundational text for us as Westerners is the Bible. I’m talking about the Bible as literature and not as a religious text. 

I didn’t have three reasons but I have two reasons. One is that I think that the overall message that the Bible gives is what we as humans do counts on some level. It’s not about whether or not you believe in God, or whether you want or not want to be a religious person, but I think that I saw a movie recently, Interstellar. It has some really important questions about what it means to be human. 

We live in a world where increasingly, you can start asking ourselves with the rise of machines and software eating the world. What is it? What is the role of humans in a certain way. I think that this basic idea, which is fundamental to our humanity, that what we do is important, on some level, what we do counts. It is something that I would want my children to live with. And, you know, I was looking at all this. 

So in a certain way, I think that the scientific quest is… If the only reason why you’d be curious about the natural world is if on some level, you came with this perspective that it matters. For me, that’s one lesson that the Bible imparts. 

Another lesson is that history has meaning. I think that if you want to live a purposeful life, there are many philosophies that sort of say, “Well, history doesn’t have meaning. It’s just one eternal cycle. You just keep going through it again and again.”

I somehow feel like I have children in the world who feel like, well, their individual lives have a meaning. Then the story that we as humanity tell has some meaning will be made… I cannot figure it out right now. But it has a meaning. It’s not pointless.

That may be overly philosophical for your audience, but for this conversation, when you said one book, I can’t say the Intelligent Investor. It’s got to be something that hits, a lot of noise, profundity. 

Then what I would just tell you, again, I hope that this is not a cop out, or it doesn’t sound like them being high falutin.. I have gotten so much out of just two or three Shakespeare plays that really have touched me to the core. 

One I quote, at the very beginning of the book is Hamlet. Hamlet is one of the closest characters in all of literature, in any language in the world. Hamlet is just this extraordinary figure. 

I think that just by exposing ourselves to a few Shakespeare plays, I think that I got exposed to just one of the broad ranges of human experience. I think there’s somewhere and somebody did a study that showed that if you read literature, a lot of it before a certain age, we become better at understanding what people’s motions are in real life, because you have just a richer based rule of thumb.

Preston Pysh  43:59  

I love the response. I love authenticity, Guy. 

It’s exactly like your book. As people go out and read this book, they’re going to see exactly what we’re talking about and what we’re referring to throughout the interview. 

So what I want to do real fast is that at the very end of the show, we always read one of our questions from our audience. Our question this week comes from Michael Valentini, and he writes, “Hello. I personally feel buying solid companies run by competent management will lead to solid returns over the long term. 

“However, I have a very difficult time determining what a good price is and determining the value of the business. Do I use a discount cash flow model? garbage in garbage out? He says, do I use relative multiples? Do I use a balance sheet to value the appreciating equity? What makes a stock an obvious value?

“Applying Buffett’s rules of buying a wonderful business at a fair price, I understand there’s no definite correct answer, but I’m very confused about the whole topic of valuation. I would love any insights that you can afford.”

So I’m going to give two quick answers, then I’m going to open it up to the floor. I think the first thing that really kind of reeks out of Security Analysis is this idea of finding a company that’s stable. Whenever you find a business that’s stable, you’re able to see trend lines. You’re gonna be able to have a little bit more trust into what the future might hold for the business. That’s the first thing I’d highlight, as you look at, potentially using a discount cash flow model or anything else is to find something that’s stable, that’s going to give you a lot better predictability. 

The next thing that I’ll tell you is that it’s not always something that you can stick on an intrinsic value, calculator, discount cash flow, calculator, anything like that. And so, I’ve got a story from the shareholders meeting during this past year, where a gentleman stood up and asked Warren Buffett about his Burlington Northern investment, which encompasses about 20% of the overall Berkshire Hathaway company, when you look at the equity.

This gentleman started off, “Mr. Buffett, whenever I take the net income, and I add in the depreciation, and I add in the amortization, and I add in the non cash items, minus the deferred taxes, and that minus the capital expenditures, the discount of future cash flows only yield about a 3% return. I can’t understand why you continue to own this company and make large capital investments in the business.”

What was amazing was Buffett’s response, “It’s not always about the numbers, okay, you can do all those hard math problems, but what we see is something that’s a little bit more unnoticed by the general public.”

What Buffett and Munger were seeing in this Burlington Northern pick was that the company has the potential to grow and expand throughout the US. This isn’t something that you’re going to see that’s tangible on the balance sheet, or the income statement. This is something that the business can just naturally do because of the market size. 

And so, what I’ll tell you is it’s just not that simple. I guess that’s the answer is you have to immerse yourself, and it goes back to some of the answers that Guy was providing earlier. You’ve got to do a lot of research. 

If you’re investing in individual stock picks opposed to an index, you’ve got to prepare yourself to do that hard research and truly understand and be able to detect that value that might be going unforeseen by so many other people. Then you have to have the trust and confidence in yourself in order to stand by the pick. 

Hari Ramachandra  48:23  

I would be interested to know Guy’s answer to this.

Guy Spier  48:29  

Funny to answer in terms of Warren Buffett just if we just talk about Burlington Northern for a second, I think that what I find so extraordinary about those railways is the rights of way. I owned for a period of time a gas pipeline business. 

What was extraordinary about that gas pipeline business is that once you own a right of way, and then there’s somebody who needs a gas pipeline built. If you own a gas pipeline anywhere in the neighborhood, of where the connection between the new gas pipeline needs to go, you have an enormous advantage, because it’s not so much just owning the assets. 

It’s owning the right of way and creating a right of way, a place to put your pipeline can be extraordinarily expensive if it goes through any kind of major open area or anything like that. 

I think that when you look at Burlington Northern, then you realize that right of way that we’re relatively inexpensive to acquire 100 years ago, and now surrounded by real estate, and it’s just impossible for anyone else to build that you kind of have an asset that is potentially infinitely valuable, because just nobody else can create. 

You can’t do that by counting numbers, as Preston said. It’s sort of seen that and saying, “Oh my god, this is incredible.” There’s only one way it can go as the United States becomes more built out, or the value of those rights of way goes up. I think that those kind of one way type equations where it only ratchets up, it never actually goes down is a great thing. 

But I will tell you that another piece of Warren Buffett’s behavior that I just found really telling in terms of this question is when I saw him by Goldman Sachs during the financial crisis.

You ask yourself, how was Warren Buffett valuing Goldman Sachs? At that time, there were so many things going on, there’s so much unpredictability. It was hard to be able to predict much about what Goldman Sachs business would look like, let alone, cash flows. 

So you look at him, and what this is in terms of valuation. Warren Buffett is saying we’re pretty close to maximum pessimism. All of these things are trading cheap, being really involved in science. And so, maximum pessimism, and I’m buying the business with the best reputation and the best brand name. There’s a certain amount of holding your finger in the air and feeling the wind, I think, in a lot of these things. 

However, I think that over time, what’s happened to me is that here’s the phrase that I think that I want to be most wary of. I tell people what I need to be most wary of when they hear an investment idea. Then they say, “Oh, I just need to get comfortable with this.” If you need to get comfortable with it, then it’s not cheap off. 

But I think there are also things that just just hit you in the face and may hit you in the face over time.  I’ll just give you one example. So you have all these automobile companies, and in general automobile companies seem to trade across the cycle between 50% of revenues and 100% revenues. 

Now, I’m not saying that one should value an automobile company, in terms of percentage of revenues, but when Fiat comes along, and it’s trading at less than 10% of its revenues. That is sort of eye popping.

I think this idea that it just has to jump at you. They say it’s a bit like finding love. You know, a guy comes to the side of the dance floor, and he says, “Well, I want to find love, but I just don’t know how I’ll know when I find it.”

The answer is, it doesn’t happen on the night where you happen to be wanting to look for it. It happens when you least expect it. When it does, it’ll jump at you in the face. I think that’s true for your investment opportunities.

Preston Pysh  52:54  

All right, that’s some amazing insight. I love that last example there guy. 

We cannot thank Guy for coming on the show enough. I mean, this was just amazing. We are just so thrilled. We’ve been really anticipating this interview. 

Guy Spier  53:12  

Oh, I just want to get to know it’s such a pleasure to be with you, but it’s not just a pleasure in a certain way. Just realize that I wasn’t just being generous with my time. I want to be generous with my time with people because I instantly realized when I started talking to you that I was with kindred spirits. 

And so, I learned as much from talking to you as anything that you might think he learned from talking to me. 

Outro  53:47  

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